Welcome to the September 2014 edition of The Director's Dilemma. To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.
Companies, and their boards, usually start small and then grow. Good boards manage to keep governance development aligned to the needs of the growing company; more normal boards progress in a series of uncomfortable readjustments as the governance model that worked in the past becomes constricting in the present and potentially lethal for the future. This month our real life case study considers what to do when the governance model needs to evolve from meeting the needs of founders who work in the business to incorporating the more diverse requirements of shareholders as circumstances change.
Consider: What would you advise a friend to do under these circumstances?
Kim is one of six founding directors of an unlisted company supplying IT services and web hosting to local businesses. She has greatly enjoyed being part of a small team that operated with high levels of friendship and trust. Two of the other founders have now reached retirement age. They want to stop working and sell their shares to the remaining directors or to external parties. They really no longer care who has ownership of the business as long as they get a fair price for their equity which is a major asset needed to fund their retirement.
One of the other directors, the largest shareholder, is a passive investor who also wants to have a high share-price and would now like to see the company start paying dividends as he, also, will retire soon and would like the income stream.
Kim’s two other board colleagues, like her, want to continue working and being ‘masters of their own destiny’. They would like to retain control of the company but cannot afford the price the other three directors are willing to sell at. They also want to expand into cloud computing services and invest earnings back into the business so don’t want to pay dividends.
The shareholders agreement stipulates consensus as being required for all decisions of the board regarding equity and dividends. The board has fallen into two camps, of three directors each, that are each accusing the other of suffering from a conflict of interest and not acting in the best interests of the company and its shareholders. Investment and strategy decisions are argued but not resolved and Kim knows the company will soon suffer if this continues.
How can Kim help her board to resolve these conflicts and move forward?